When it comes to investing, feeling secure with your decisions is key. Without this confidence, investors tend to be uncomfortable with their positions and second-guess themselves. One of the most important tools in the investor’s toolkit is the Relative Strength Index (RSI). The RSI is a momentum oscillator, developed by J. Welles Wilder, that measures the speed and change of price movements. In this article, I will discuss three ways that I use RSI to analyze trends when I invest.
The first way I use RSI is to look for overbought/oversold conditions. The RSI index is plotted on a 0-100 scale, with 30 as the oversold line and 70 as the overbought line. If the RSI crosses over the 70 line, this could be an indication of an overbought market, warning a potential sell signal. On the other hand, if the RSI crosses below the 30 line, this could be an indication of an oversold market, warning a potential buy signal.
The second way I use RSI is to analyze divergences. A divergence is a sign that the direction of price trends is reversing. For example, when the price is still increasing but RSI is decreasing, this could be a bearish divergence and it’s time to sell. On the other hand, if the price is decreasing and RSI is increasing, this could be a bullish divergence and it’s time to buy.
The third way I use RSI is to detect potential breakouts. A breakout is a situation when the price moves outside of a defined range. The RSI can be used to identify when breakouts may be on the horizon, alerting the investor to take a position before the breakout occurs.
In conclusion, I use the RSI in three ways to analyze trends when I invest. I look for overbought/oversold conditions by examining the RSI on a 0-100 scale. I analyze divergences by taking into account the changing direction of price trends when the RSI moves in the opposite direction. And finally, I detect potential breakouts before they occur. By being aware of all these signs when investing, I have been able to increase my returns significantly.
